The archived blog of the Project On Government Oversight (POGO).

Mar 22, 2010

A TARP Program by Any Other Name Still Needs Oversight

POGO just sent a letter to the House Committees on
Financial
Services and Small Business raising concerns about a recent proposal to
create
a bailout program for small businesses outside of the oversight rules
established
under the Troubled Asset Relief Program (TARP).

According to the administration’s legislative
proposal, the Treasury Department would transfer $30 billion from
TARP into
a new Small Business Lending Fund (SBLF) that will be used to encourage
community banks to lend more to small businesses. Treasury Assistant
Secretary
for Financial Stability Herbert Allison recently testified
to Congress that the administration prefers to establish the SBLF
outside
of TARP because “various restrictions under TARP have had unanticipated
consequences for small and mid-sized banks,” and that even if these
restrictions were removed, many small banks would still be hesitant to
participate because they “believe there is a stigma attached to
accepting TARP
capital.”

Although it’s important to structure the program in
a way
that encourages maximum participation, POGO urged Congress to think
twice
before exempting the SBLF from TARP oversight rules designed to
safeguard the
interests of taxpayers and to ensure that the funds reach their intended
recipients. Neil Barofsky, the Special Inspector General for the
Troubled Asset
Relief Program (SIGTARP), has also raised
red flags about the program, stating that the administration’s
proposal to
circumvent TARP is all the more surprising given the striking
similarities
between the SBLF and the TARP’s Capital
Purchase Program (CPP). For instance, both programs provide capital
in the
form of preferred equity, and in both cases, the amount of capital
provided is
determined by the bank’s risk-weighted assets. Furthermore, Treasury has
said
that $11 billion in CPP investments would be eligible for conversion to
the
SBLF, and the SIGTARP has estimated that up to 95 percent of the current
CPP
participants would be eligible to convert.

The SIGTARP wrote
to Assistant Secretary Allison last month raising concerns about
reports
that the administration was considering excluding the TARP watchdogs
from the
oversight provisions of its proposal. In response, Rep. Darrell Issa
(R-CA),
Ranking Member of the House Committee on Oversight and Government
Reform, issued
a statement affirming that the “SIGTARP has been an aggressive
watchdog for
American taxpayers,” and warning that “this attempt to circumvent their
oversight must not go forward.”

If the SBLF is created outside of TARP, the program
should still be
governed by comparable oversight mechanisms: for instance, recipients
should be required
to report on how they actually use the funds, and Treasury should be
required
to document any communications with outside parties seeking to
influence
the SBLF investments. POGO also called on Congress to grant explicit
oversight
authority to the appropriate watchdog, be it the SIGTARP or the Treasury
Department Inspector General, and to give it all the tools and resources
it
needs to root out waste, fraud, and abuse in the program.

Or as we put in our press statement: “A bailout
program for
small businesses still needs big oversight.”